International institutional investors are intrigued by the rise in the Karachi Stock Exchange (KSE) but asset management companies that are offering direct exposure to Pakistani equities are struggling to find buyers.
There is currently no mutual fund in America, Europe or other parts of Asia that specifically invests solely in Pakistani stocks. But there is interest in launching exchange-traded funds (ETFs) – investment funds that trade on exchanges like stocks – that offer investors direct exposure to KSE.
As of today, there is only one fund that has actually been launched, the Singapore-listed db X-Trackers MSCI Pakistan Investable Market ETF. It was launched by German financial giant Deutsche Bank in September 2011 but has since failed to attract lot of interest, currently only managing about $5.8 million in assets, despite having yielded a 14.22% dollar-denominated return since inception.
Deutsche Bank seems unworried, especially since the fund is rather young and may yet attract more interest.
“For all frontier market ETFs, it is normal for clients to take some time to consider investing in it,” said Deutsche Bank’s Asian ETF head Marco Montanari. “Some clients wish to observe ETF’s track record and monitor the product before investing in it.”
At least Deutsche Bank went ahead and took the plunge. Other asset managers have struggled to even launch their Pakistan funds. Global X Fund Management, an investment company based in New York, first filed for the registration of a US-listed ETF that would invest in Pakistan in February 2010, but the Global X Pakistan KSE-30 ETF has yet to actually launch.
Since the fund has not yet launched, US regulations prohibit Global X from commenting specifically on the Pakistan ETF. Nonetheless, they did indicate that US investors seem wary of investing in “frontier markets” – the category of more risky markets in which Pakistan has been categorised by global investment research and index provider MSCI.
“Current uncertainty in the market has investors pursuing more conservative strategies, which can make frontier market ETFs more difficult to sell,” said Global X marketing executive Alexandra Levis.
Who would invest?
So would expatriate Pakistanis and other members of Pakistani diaspora be the target market of ETFs investing in Pakistan? The asset management companies behind them do not seem to think so.
Deutsche Bank is marketing its Pakistan ETF to institutional investors in Europe, Asia and Middle East. “The most significant demand for ETFs comes from institutional investors instead of retail investors,” said Montanari.
The reaction amongst expatriate Pakistanis to the chance of investing in US or Singapore-listed funds that invest in Pakistan seems to be indifferent at best.
“I think I would treat it just like any other investment: if I can see metrics that prove good performance track record it could be a good option,” said Saad Rizvi, a Yale graduate working at Pearson, a publishing house, in London.
Others were outright opposed to the idea of investing in Pakistan funds. “When building portfolios, an international diversified investor would search for certain yield given the risks, and can easily achieve that goal without exposure to Pakistan with its idiosyncratic and non-diversifiable risks (political, regulatory, liquidity),” said Usman Khosa, a second-year MBA student at University of Chicago’s Booth School of Business who will be joining Bank of America Merrill Lynch’s investment banking division after graduation.
And then there were investors who were very keen to invest in Pakistan, but already had access to Pakistani equities directly through brokers located in Karachi.
“I would only be interested if ETFs are structured to be competitive with local index funds,” said Sohail Razzaq, a Stanford graduate working at Google’s headquarters in Mountain View, California, but invests directly through a broker based in Karachi. “My entire approach is dependent on the fact that I have ready access to local brokers and index funds as well as [the foreign-listed] ETFs.”
Published in The Express Tribune, May 2nd, 2012.